Given the popularity of Italian food when it comes to eating out, it is not uncommon for landlords to impose restrictions in leases on operators who compete with an anchor tenant whose core offer includes pizzas. The question is does this qualify as anti-competitive behaviour and, for tenants who are subject to such competition restrictions, what can they do about it?
As a tenant operating a restaurant in a shopping centre or retail park you may have experienced the following impasse:
- You find that there are a significant number of customers popping in just for a coffee, independently of a meal. Another trend you’ve noticed is the popularity of pizza as a menu choice. Naturally it makes commercial sense to cater to those demands. However, this leads to your landlord pointing out a restriction in your lease which means you can only serve coffee as part of a meal – and not separately – and that there is a limit on the number of pizzas that you can sell. This comes as a bit of a blow to you.
- Your lease is coming to an end and you want to renew it (which you are entitled to do under the Landlord and Tenant Act 1954). You want the user clause in your tenancy or lease to be changed to allow for the sale of pizza and stand-alone coffee but your landlord wants to restrict you in these respects.
What can you do in the face of this seemingly anti-competitive behaviour?
The interests at stake here are not hard to work out. The object of the restrictions is clearly to protect tenants from a certain level of competition against each other. The landlord is likely to feel that ensuring there is a range of businesses operating in the shopping centre or retail park will make it more attractive to customers. If the landlord is a local authority, it may well be seen as a good thing to promote local businesses, so as to ensure that they have a viable future, and it will want to provide some measure of protection to them. Lastly, and by no means least, the landlord is likely to take the view that he can obtain better rents where operators have limited or no competition.
As advisers to restaurant operators we have regularly seen the following restrictions imposed in leases:
- restrictions against the sale of coffee or other items other than with and following a meal
- restrictions against a change in a menu or the theme of the restaurant
- restrictions against the sale of certain food types if they exceed, say, a given percentage of turnover at the premises – this often applies to sale of pizza
The landlord may have accepted a restriction on letting units without such a covenant or against allowing a breach of covenant to continue. This is a duty he may have to one or more of the tenants of the centre, deemed to be the more important occupiers.
Does Competition Law apply?
Covenants of these types in leases have been quite common for many years but, surprisingly, there is not a great deal of case law or judicial comment on them in the context of a breach of the competition laws. A recent case involving newsagents, Martin Retail, does provide some interesting insights however.
The common law of the UK has always leaned against covenants in restraint of trade, culminating in the Competition Act 1998.
In Martin, the story is shortly told. The shop in question, occupied by Martin, was within one of eleven parades of shops located in the centre of a residential housing estate, Furnace Park, outside Crawley town centre, with 2,400 households and approximately 5,700 residents. Martin wanted to renew their lease and to be able to sell a wider range of goods than the user clause in the existing lease permitted. Specifically, it wanted to extend its range to groceries including fresh foods, alcohol and household goods – in other words so it would be used as a convenience store. However, the local council wanted to restrict the new lease to the use of newsagents, tobacconist, confectioner, stationer and bookseller (plus some other items), with an express prohibition against the sale of alcohol, grocery, convenience goods and other uses falling within A1 of the Use Classes Order. The issue between landlord and tenant therefore turned upon whether the Council’s proposed restrictive use was an unlawful breach of competition legislation.
In this case, the judge found against the Council, a decision which does not appear to have been appealed, making it the only reported decision that we can find on this point.
What is the law?
The Competition Act 1998 prohibits agreements which affect trade or have as their object or effect the prevention, restriction or distortion of competition within the United Kingdom. Could one of these restrictions fall foul of this?
The answer is yes. There are, however, some exemptions and an arrangement is exempt if:
- it contributes to improving production or distribution; or
- it promotes technical or economic progress (while allowing consumers a fair share of the resulting benefits).
The most important part of the Act essentially says that the person who would benefit from an exemption has to prove that the conditions for exemption are satisfied. This was accepted by the judge in Martin and, as a result, the Council bore the burden of proving the conditions for exemption were satisfied (i.e. that it would improve production or distribution or promote technical or economic progress). The judge found against the Council because it had not produced expert evidence on competition law related issues.
What does this mean for you?
If a landlord takes action against you and you contend that the relevant clause is prohibited under the Competition Act 1998, the landlord may be faced with proving that the relevant clause falls within the exemption. So the issues will be:
- You need to be satisfied that the invalidity of one provision of your lease does not make the entire lease invalid. This has been explored in some detail in cases involving pub and brewer’s ties, the argument being, in those cases, that the invalidity of the tie should not affect obligations to pay rent or prejudice the other provisions of the lease. There is quite a lot of case law on this and Kimbells’ specialist legal team (since renamed Freeths), was involved in a number of those cases.
- You will need to look very carefully at the nature of the restrictions you are under. The guidance issued by the Office of Fair Trading is very helpful but the nature of the arrangements can lead to some very fine distinctions (the authors of the OFT guide have struggled with some of the issues for this reason). Particular issues which need to be identified are:
- The role of any anchor tenant and whether their presence or requirements can lead to benefits – e.g. better footfall, investment and wider product ranges or, on the other hand, anti-competitive practices – i.e. elimination of competition.
- Any ‘exclusivity’ (and this can be difficult to pin down) will be a particular point. The authors of the OFT guide suggest that an exclusivity arrangement is more likely to foreclose competition. They go on to say that restrictions in leases are unlikely to restrict competition, but this cannot always be right. If a landlord restricts use or requires particular uses this has the potential to restrict competition. In the example given at the start of this article it must follow that exclusivity for, say, coffee or pizzas, is going to be more difficult to justify. In fact, in Crawley, the Council appears to have been using covenants as a way of enforcing exclusivity in particular cases which rather undermines the OFT view.
- Geography is an important point. Most of us might not consider the approach of the Council in Crawley to be anti-competitive because it was a suburban row of shops. The exponential growth in coffee shops suggests that it might be difficult to prove anti-competitive facts in such a case – after all, there is always, seemingly, another coffee shop around the corner. Catchment areas are, however, important. Areas are often quoted in drive time so that a 20 minute drive time is thought appropriate for cinemas, but 400 to 880 metres for betting shops.
- It is possible to justify apparent restraints of trade. In some cases the operators are simply not big enough to have any impact, which might have been thought to be the case in the Furnace Green example. Crawley Council was asked to justify its policy, which it could not do so – although this may be possible in other cases.
- If the intention is essentially to give an operator some exclusivity and this results in higher prices for the consumer – often the case where the competition has been eliminated – it is the likely price differential which will make this harder to justify.
What conclusions can we draw from this?
- Every case is different and has to be looked at on its particular facts.
- Tenants must take advantage of the burden of proof lying with the landlord, so that they (or any other person seeking to achieve the benefits afforded) have to prove the user clause would be exempt.
- Look very carefully at what arrangements might be behind any complaints or threats against you – if exclusivity is behind this, then this is very likely to be an important point.
- If the arrangement leads to, or tends to lead to higher prices for the consumer, this is likely to be an arrangement which is harder to justify.
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The content of this page is a summary of the law in force at the present time and is not exhaustive, nor does it contain definitive advice. Specialist legal advice should be sought in relation to any queries that may arise.